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Slow South Korean inflation encourages central bank to tighten monetary policy

South Korea’s inflation dropped more than expected in February, according to data released by the South Korea Bureau of Statistics on March 6. The consumer price index (CPI) rose 4.8% year-on-year in February, slower than January’s 5.2% and below the 5% expectation.

This drop in inflation has encouraged the country’s central bank, the Bank of Korea (BOK), to extend the time it takes to suspend tightening monetary policy. The BOK has been fighting inflationary pressures by raising interest rates by 3 percentage points since August 2021 and held interest rates in February last year.

South Korea’s Finance Minister Chu Kyung-ho attributed the slower inflation to falling oil prices in February. Chu said in a post-inflation statement, “The downward trend of inflation may become clearer. If there are no unexpected external factors affecting.”

BOK Governor Ri Chang-yong expects inflation to fall below 5% in March and gradually drop to around 3% by the end of the year. In February, the BOK lowered its annual inflation forecast for 2023 to 3.5% from 3.6%.

The BOK has been trying to balance the need to control inflation with the need to support the country’s economic recovery from the COVID-19 pandemic. With slow inflation, the BOK may have more room to continue its monetary policy tightening measures.

The drop in inflation is good news for South Korea, which has been struggling with high inflation for several months. The BOK will be closely monitoring the inflation data to determine its future course of action.

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